Why cutting tax rates won't work

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Not all well-off Australians are grasping for a tax cut despite
the hue and cry made on their behalf in recent months. And it is
just as well, given the likely cost of helping single mothers and
disability pensioners into the workforce.

From the Business Council of Australia to the trade union leader
Bill Shorten, it can seem everyone is united in urging the
Government to ease the tax burden at the top.

But a poll published in The Australian Financial Review
this week shows most top income-earners want tax cuts not for
themselves but for the less well-off. The IPSOS poll of 1001 people
showed about two-thirds of those who earn more than $75,000 think
lower-income workers should come first in the tax cut queue.
Better-off Australians, it seems, have a well-developed sense of
fairness that the Government may need to tap.

The Government is under pressure from the business lobby, think
tanks and its own back bench "ginger" group to cut the top tax
rates from 47 and

42 per cent to 30 per cent, at least over the long term. The
theory is a tax cut will give top earners more incentive to work
harder, and the benefits will trickle down to all.

Handing the top one-third of households a $13 billion a year
windfall would have to be offset by massive funding cuts to
programs, as the Finance Minister, Senator Nick Minchin, who did
the calculations, has pointed out. That means cuts to health,
pensions and education.

This is a bad time for revenue to be cut. It is never
politically easy to cut existing programs, as the outcry over
proposed limits on Medicare funding for assisted fertility
treatment reminds us. But new programs or outlays are likely to be
needed if the Government is to make welfare reform a reality. If
anyone needs help and financial incentives (as well as stick) to
work more it is disability pensioners, sole parents, the unemployed
and mothers.

Giving tax breaks to the well-off in the hope they will work
harder is an uncertain proposition. It is just as likely they will
pocket the extra income, reduce their hours and play golf. And why
not? Australia is now notorious for a culture of long hours that
plays havoc with family life. It is morally questionable whether we
should provide financial incentives to motivate people who are
doubtless already working hard to spend even more time on the
job.

The serious problem of disincentive, lack of motivation and
underwork is at the bottom, not the top, of the income spectrum.
Australia has worryingly high levels of underemployment. Compared
with other developed countries, we have, in particular, a high
proportion of men aged 25-54 out of the workforce - of the 25
richest countries we rank 21st - as well as men aged 55-59 and
mothers. Even in these prosperous times, too many Australians are
blighted by poverty. They have poor skills and poor English, and
suffer age discrimination and personal problems with mental health,
addictions, disability and domestic violence.

The Melbourne Institute's Household, Income and Labour Force
Dynamics in Australia survey shows that about one-fifth of the
population, or 4.4 million people, lived below the poverty line for
at least one year in the three years to 2003. And even at the
height of Australia's prosperity in 2002-03, one in eight children
was living below the poverty line. Underworked Australians should
be the Government's top priority, not the overworked. Cutting the
top marginal tax rate won't help them move from welfare to work.
Financial incentives to work more hours are likely to have a much
bigger influence on partnered mothers who want to re-enter the
workforce, and sole parents who want to move off welfare than on
highly paid surgeons and bankers already toiling 80 hours a
week.

But it won't be easy for people with rusty skills, poor
education, no confidence and mental or physical problems to find a
job. Significant cuts to government revenue will only make it hard
to fund the programs needed to help train and educate them, find
them work and provide the counselling they might need and
child-care subsidies and places.

For all the advantages top income earners have enjoyed under
John Howard - from the private insurance rebate and increased aid
to elite schools to the surge in executive salaries - Australia has
remained reasonably egalitarian, says Professor Ann Harding, of the
National Centre for Social and Economic Modelling. Her work,
showing only a small rise in inequality, has surprised and angered
the Howard haters.

It seems our highly progressive income tax regime, high levels
of family payments and significant spending on social programs have
offset the regressive effects of the GST. But cutting the top tax
rate could jeopardise the status quo.

Of course, if we got rid of a raft of tax lurks - from income
splitting to capital gains concessions - there might be money in
the kitty to cut the top, and lower, tax rates, and fund programs
for welfare reform. But I would not hold my breath, nor trust any
reform that puts the horse (the tax cut) before the cart (the
closing of loopholes).

If Australia is to remain a reasonably egalitarian society, the
Government should put tax cuts for the well-off low on its "to do"
list. It has a good case to mount for focusing on the
underemployed. And if it throws in some mutual obligation, it
should be able to convince most well-off Australians that it is
fair to spend the money where it is most needed.